Maximizing Year-End Tax Strategies in 2024: Preparing for the TCJA Sunset
As 2024 nears its end, taking action on tax-saving strategies is more critical than ever. With the Tax Cuts and Jobs Act (TCJA) scheduled to sunset in 2026, many current tax provisions, including reduced individual tax rates, are set to expire. This sunset will likely bring tax rate increases across the board, with rates potentially rising 3-8%+ depending on your income level. Strategic planning now allows you to leverage lower tax rates and maximize your wealth in a way that will benefit you, both before and after these changes take effect. Here are key strategies to consider that provide the highest value in preparation for potential tax hikes.
1. Roth Conversions: Locking in Today’s Lower Tax Rates
A Roth conversion is one of the most impactful strategies available under the TCJA’s lower tax rates. By moving funds from a traditional IRA to a Roth IRA, you’ll pay taxes on the converted amount now, taking advantage of current rates before they rise. While you’ll pay taxes now, Roth conversions allow your money to grow tax-free, and withdrawals in retirement will be tax-free as well. This approach is especially valuable if you expect to be in a higher tax bracket in the future, or need a lump sum of cash at some point to buy a car, or fund long-term care needs.
Why Act Now: As tax brackets are set to increase in 2026, converting now at a lower rate could save thousands in taxes over your lifetime, making this one of the highest-impact moves to make before year-end.
2. Tax-Loss Harvesting and Gain Harvesting: Reducing Current and Future Taxable Income
Tax-loss harvesting and gain harvesting are year-round strategies that provide significant tax savings, especially during periods of market volatility. By selling underperforming investments, you can offset gains with losses to reduce your taxable income. Gain harvesting can also be used if you’re in a low tax bracket, allowing you to lock in gains at a lower tax rate (or a 0% tax rate).
Why Act Now: With the top tax rates set to increase, using these strategies to reduce taxable income today can save more in the long run. Additionally, harvesting losses can be particularly useful in down years, as it allows you to offset future gains.
3. Strategic Asset Location: Positioning for Tax Efficiency
Optimizing asset location is a powerful yet often overlooked strategy. By placing high-growth assets in Roth accounts, income-yielding investments in tax-deferred accounts, and buy-and-hold assets in taxable accounts, you can manage your overall tax burden. This approach minimizes the impact of taxes on your returns and takes advantage of different tax treatments. Vanguard states that correctly locating your assets could add up to 0.75% to annual returns.
Why Act Now: Asset location can make a significant difference in tax efficiency, especially as we anticipate higher tax rates. Structuring your accounts to minimize tax drag can amplify compounding, increasing your overall portfolio’s growth.
4. Maximizing HSA Contributions: Triple Tax Benefits
Health Savings Accounts (HSAs) are unique in offering a triple tax advantage: pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. For 2024, married couples can contribute up to $8,300, with an additional $1,000 in catch-up contributions if you or your spouse is over 55.
Why Act Now: HSAs provide a way to reduce taxable income and build a tax-free fund for medical expenses in retirement, where healthcare is often one of the largest expenses. These benefits remain even if tax rates increase, making HSAs a high-value savings vehicle. An old blog on HSAs on my website offers a template I use to track expenses.
5. Review Benefits Plans and Strongly Consider Roth 401(k)s
Employer-sponsored plans, especially Roth 401(k)s, allow for tax-free growth and withdrawals, which will be especially beneficial as tax rates rise. The Roth 401(k) is an attractive option for individuals expecting higher taxes in retirement, enabling them to lock in today’s tax rates on contributions. Employer plans (where applicable) are also full of tax savings options such as ESPP plans, optimization of ISOs and NQSO, 83(b) elections, and more that can be optimized to minimize your lifetime tax bill.
Why Act Now: Contributing to Roth 401(k)s now, while tax rates are lower, provides a valuable opportunity to lock in tax-free income for retirement. Employer-sponsored plans also offer several tax-saving perks, such as deferred compensation options, that can further reduce taxable income.
6. Maximizing Retirement Plan Contributions and Consider Backdoor Roth Conversions
One of the best ways to build tax-advantaged wealth is by maximizing contributions to retirement accounts. For 2024, the total limit on combined employer and employee contributions to retirement plans is $69,000 (or $76,500 if you’re eligible for catch-up contributions). Be on the lookout for Mega Backdoor Roth opportunities via after-tax accounts and the daily conversion of after-tax accounts.
You can also contribute up to $7,000 per year to an IRA per person (or $8,000 with catch-up if over age 50). For high-income earners who exceed Roth IRA income limits, a Backdoor Roth IRA can be a valuable strategy to gain Roth benefits. Key Consideration: Be mindful of the “pro-rata rule,” which impacts the taxability of a Backdoor Roth conversion. This rule requires you to consider all IRA assets when calculating taxes due on the conversion amount.
Why Act Now: By fully funding your retirement accounts before year-end, you’ll benefit from tax-deferred or tax-free growth, which will be especially advantageous as tax rates are projected to increase in 2026.
7. Strategic Use of the Annual Gift Tax Exclusion
The annual gift tax exclusion for 2024 is $18,000 per individual ($36,000 per couple), allowing you to gift assets to family members tax-free. Making full use of this exclusion can reduce the size of your taxable estate while transferring wealth to loved ones.
Why Act Now: With the estate tax exemption potentially decreasing in 2026, leveraging the annual gift exclusion now is an effective way to shift wealth while maximizing tax-free transfers.
8. Optimize Distribution Planning to Take Advantage of Low Tax Brackets
For those that are retired or working part-time, shifting your distribution strategy to take withdrawals from tax-deferred accounts in lower-income years can reduce your overall lifetime tax burden. By tapping into tax-deferred accounts during lower tax bracket years, you may benefit from reduced taxes while managing income levels effectively.
Why Act Now: Adjusting your distribution strategy now allows you to take advantage of today’s lower rates, especially if you’re in a lower income year. This is a smart strategy as tax rates are projected to increase in the coming years.
9. Reevaluate the Timing of Deductions
If taxpayers expect their tax rate to increase after the TCJA provisions expire, they may benefit from postponing certain deductible expenses until those higher rates take effect, maximizing the value of these deductions when they can offset income taxed at higher rates. This strategy applies to various deductions such as business expenses, charitable donations, and State and Local Taxes (SALT payments) for 2025. SALT payments will no longer be limited by the $10,000 ceiling. In addition, the scheduled reduction of standard deduction amounts may make itemized deductions more beneficial than they were previously.
Why It’s Impactful: As tax rates rise, deductions become more valuable against that higher income. By strategically timing these expenses, clients can minimize taxable income at higher rates, ultimately reducing their lifetime tax burden
10. Engage in Estate Planning and Charitable Giving for Tax Efficiency
Estate planning is more critical now, with the potential for the estate tax exemption to be halved after the TCJA sunset. Those with net worths of ~$15,000,000 or more, are strongly encouraged to act to save your family potentially millions in estate/inheritance taxes. Leveraging strategies like donor-advised funds, charitable remainder trusts, spousal lifetime access trusts, grantor retained annuity trusts, dynasty trusts, and other planned giving vehicles can maximize your family giving and/or charitable impact while reducing taxes.
Why Act Now: With the estate tax exemption set to decrease substantially in 2026, now is the time to make larger family gifts and charitable contributions, and craft flexible estate plans that take advantage of today’s higher exemption levels. It’s a key step to safeguarding your estate from future tax liabilities while supporting causes you care about.
Planning for the Future
The 2026 sunset of the TCJA provisions is a wake-up call for proactive tax planning. By focusing on tax-efficient accounts, strategic asset location, and making Roth conversions now, you can better manage your tax burden and secure tax-free income for the future. These strategies offer some of the highest returns on tax planning, especially with impending rate increases.
Consider discussing these strategies with your advisor today to tailor your year-end tax planning and position your wealth to thrive beyond 2026. Taking action now ensures that you’re making the most of today’s tax environment and preparing for a financially sound future.
